ACC 113 Chapter Notes - Chapter 1: Income Statement
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Maryville Manufacturing designs and builds custom mudroomstorage benches. All of the mudroom storage benches are constructedwith rustic hickory. Its budgeted manufacturing costs for the 2018year are as follows.
Overhead Cost Pools | Amount |
Purchasing | $ 45,000 |
Handling materials | 50,000 |
Production (cutting, milling, finishing) | 130,000 |
Setting up machines | 85,000 |
Inspecting | 60,000 |
Inventory control (raw materials and finished goods) | 80,000 |
Utilities | 100,000 |
Total budgeted overhead costs | $550,000 |
For the last 5 years, Maryville Manufacturing has been chargingoverhead to products on the basis of materials cost. For the year2018, materials cost of $500,000 were budgeted.
Jim Johnson, owner-manager of Maryville Manufacturing, recentlydirected his accountant, Ledger Kaufman, to implement theactivity-based costing system that he has repeatedly proposed. AtJimâs request, Ledger and the production foreman identify thefollowing cost drivers and their usage for the previously budgetedoverhead cost pools.
Overhead Cost Pools | Activity Cost Drivers | Expected Use of Cost Drivers |
Purchasing | Number of orders | 500 |
Handling materials | Number of moves | 5,000 |
Production (cutting, milling, finishing) | Direct labor hours | 65,000 |
Setting up machines | Number of setups | 1,000 |
Inspecting | Number of inspections | 4,000 |
Inventory control (raw materials and finished goods) | Number of components | 40,000 |
Utilities | Square feet occupied | 50,000 |
Doug Russell, sales manager, has received an order for 12 custommudroom storage benches from Homes by Kathy. At Dougâs request,Ledger prepares costs estimates for producing 12 mudroom storagebenches so Doug can submit a contract price per mudroom storagebench to Homes by Kathy. He accumulates the following data for theproduction of 12 mudroom storage benches.
Direct materials | $5,200 |
Direct labor | $3,500 |
Direct labor hours | 200 |
Number of purchase orders | 3 |
Number of material moves | 32 |
Number of machine setups | 4 |
Number of inspections | 20 |
Number of components | 640 |
Number of square feet occupied | 320 |
Required:
Compute the predetermined overhead rate using traditionalcosting with direct materials cost as the allocation base.
Compute the total cost of manufacturing one mudroom storagebench using direct materials cost as the allocation base formanufacturing overhead.
Compute the predetermined overhead rate using traditionalcosting with direct labor hours as the allocation base.
Compute the total cost of manufacturing one mudroom storagebench using direct labor hours as the allocation for manufacturingoverhead.
Compute the predetermined overhead rate per cost driver for eachof the overhead cost pools using the proposed activity-basedcosting system.
Compute the total cost of manufacturing one mudroom storagebench using the proposed activity-based costing system.
Which allocation base is preferable under traditional costingand why?
Which costing system (traditional or activity-based) ispreferable in pricing decisions and why?
Problem 17-3A (Part Level Submission)
Shaker Stairs Co. designs and builds factory-made premium wooden stairways for homes. The manufactured stairway components (spindles, risers, hangers, hand rails) permit installation of stairways of varying lengths and widths. All are of white oak wood. Budgeted manufacturing overhead costs for the year 2017 are as follows.
| Overhead Cost Pools | Amount | |
| Purchasing | $73,800 | |
| Handling materials | 82,160 | |
| Production (cutting, milling, finishing) | 221,000 | |
| Setting up machines | 96,250 | |
| Inspecting | 96,000 | |
| Inventory control (raw materials and finished goods) | 131,040 | |
| Utilities | 450,000 | |
| Total budgeted overhead costs | $1,150,250 |
For the last 4 years, Shaker Stairs Co. has been charging overhead to products on the basis of machine hours. For the year 2017, 100,000 machine hours are budgeted.
Jeremy Nolan, owner-manager of Shaker Stairs Co., recently directed his accountant, Bill Seagren, to implement the activity-based costing system that he has repeatedly proposed. At Jeremy Nolanâs request, Bill and the production foreman identify the following cost drivers and their usage for the previously budgeted overhead cost pools.
| Activity Cost Pools | Cost Drivers | Expected Use of | ||
| Purchasing | Number of orders | 600 | ||
| Handling materials | Number of moves | 8,000 | ||
| Production (cutting, milling, finishing) | Direct labor hours | 100,000 | ||
| Setting up machines | Number of setups | 1,250 | ||
| Inspecting | Number of inspections | 6,000 | ||
| Inventory control (raw materials and finished goods) | Number of components | 168,000 | ||
| Utilities | Square feet occupied | 90,000 |
Steve Hannon, sales manager, has received an order for 250 stairways from Community Builders, Inc., a large housing development contractor. At Steveâs request, Bill prepares cost estimates for producing components for 250 stairways so Steve can submit a contract price per stairway to Community Builders. He accumulates the following data for the production of 250 stairways.
| Direct materials | $104,200 | |
| Direct labor | $112,200 | |
| Machine hours | 15,300 | |
| Direct labor hours | 5,300 | |
| Number of purchase orders | 60 | |
| Number of material moves | 800 | |
| Number of machine setups | 100 | |
| Number of inspections | 450 | |
| Number of components | 16,000 | |
| Number of square feet occupied | 8,000 |
a) Compute the predetermined overhead rate using traditional costing with machine hours as the basis.
(b) What is the manufacturing cost per stairway under traditional costing?
(c) What is the manufacturing cost per stairway under the proposed activity-based costing?(Prepare all of the necessary schedules.)
(d) Which of the two costing systems is preferable in pricing decisions and why?
